Your Role in Internal Control - Episode 9, This Case Shows Why a Sound Control Environment is Essential

What can happen in a department with a poor control environment, where controls are lax, oversight is poor, and no one says anything or follows up? Here, we review what a California university learned when the control environment in one of its departments was lacking.

The Case at Chico State

The Accounting Department in CSU Chico's business school provides examples of the many things that can go wrong and their repercussions when a control system breaks down.

News of the case at Chico State first broke in December 2020 with these headlines:

Enterprise-Record - Investigation unfolds ethical lapses in a Chico State department, $1 million of financial losses

The Orion - Internal Investigation find $1 million in alleged fraud by four employees of Chico State's Department of Accounting

Prompting public acknowledgment of the situation by its president to its campus community:

As a public university, we have a solemn obligation to ensure that our funds are spent appropriately and efficiently and, further, that we hold ourselves to the highest standards of accountability. 

Gayle Hutchinson, President, California State University, Chico 

In February 2021, local ABC news affiliate KRCR released the results of its investigative reporting, detailing the following allegations and costs covering five years:

  • Fraudulent mileage claims - $1,700
  • Questionable gift cards - $2,500
  • Personal travel - $14,000
  • Personal expenses - $26,000
  • Excessive hospitality - $30,000
  • Unreported absences - $68,000
  • Staff paid but not working - $90,000
  • Unsubstantiated compensation - $890,000

But KRCR further explained how the allegations included manipulating course enrollment for the financial benefit of specific professors and overriding tenure procedures to benefit a colleague.

Its news reporting also included a four-minute video explaining the allegations, especially about manipulated course enrollment and overridden tenure procedures. Here's the link to its report and video:

KRCR ABC 7 - Chico State Fraud: Investigation reveals how employees tricked school out of $1 million

If you're taking the Internal Control All-Star exam, you must watch the KRCR video to answer two exam questions (you'll also have to watch a short ad).

Criminal Charges

In December 2021, KRCR reported that police had charged three former Chico State employees with five counts of defrauding the university and the university's foundation.

KRCR ABC 7 - Three former Chico State employees charged in grand theft investigation

The total of the five criminal charges, $44,867, was far less than the excess of $1 million first reported, with three counts related to travel expenses. This article is excellent because it explains how administrative and criminal charges differ. 

In response to KRCR's question about why it took so long to bring criminal charges, Butte County District Attorney Mike Ramsey replied (emphasis mine):

"Because there's a difference between administrative charges and criminal charges. Administrative charges are only for the purposes of basically dismissing the employee and does not have the same burden of proof that a criminal case would have, obviously, beyond a reasonable doubt. Also, talking about criminal intent as opposed to a personnel matter. It's much more intensive."

"Much of those administrative charges we couldn't go criminally because the criminal intent was dissipated by the fact that the university admittedly had some rather lax processes and lax administrative checks and balances which they've indicated that they have resolved at this point, but back then were not there, which of course takes out our criminal intent."

It's fairly egregious behavior and behavior you would think that accounting professors should know better.

Mike Ramsey, Butte County District Attorney

Those are pretty harsh words from the district attorney. This case shows how a poor control environment in a mid-level department can have university-wide monetary and reputational implications for the institution and employees involved.  

Remember our Episode 4 video, where the first department head rationalized her policy violation because it was "within budget." While we don't know how everything played out at Chico State, we could surmise the situation started with a few padded expense reports or minor errors that no one caught. 

In either case, the schemes snowballed once it was clear that no one would notice or say anything. Fraud cases often start small and grow as the perpetrator exploits the identified control weakness and becomes increasingly brazen. 

Addendum - Southwestern College

Remember when Bill, the university's chief fundraiser, emphasized the following point in our executive team dramatization in Episode 1, "The donors have to know that we are good stewards."

And how our host explained that risks can involve much more than the loss of a particular asset in Episode 5, "The more important risk could be the loss of public trust or donor confidence ..."

These themes immediately came to mind when a problem at a local small college recently became public.

KWCH 12 News - Lead donor at Southwestern College reacts to investigation into misplaced funds

If you're taking the Internal Control All-Star exam, you must watch the KWCH video to answer two exam questions (you'll also have to watch a short ad).

The basics of the situation are that the college raised nearly $2 million for athletic facilities. However, the college put $1.2 million of the amount raised into its general fund and used it for operations.

If we got to sue the college, we’re going to do it. But a hundred people deserve their money back into the DeHaven Center. That's what they wrote the checks for. That's what it should be for. They deserve that to happen.

Richard Jantz, Lead Donor 

The misapplication occurred in 2020, preceding Dr. Frombgen’s appointment as president on July 1, 2022.

I can tell you this - the practices that had occurred to allow this situation to happen have been changed, modified, and fixed. It will not happen again. I am heartbroken by it because we need to make this right and we will.

Liz Frombgen, President, Southwestern College 

The situations at Chico State and Southwestern College are entirely different. But both spilled into public view, drawing unwanted publicity and loss of trust.